The editors of the EUROPP blog, run by the Public Policy
Group at the London School of Economics, wanted to contrast Hayekian and
Keynesian views of the Eurozone crisis, by running posts from either side. Here
is the Hayekian view, from Steven Horwitz, and for better or worse I provide
the Keynesian view here. To be honest it is my view of the Eurozone crisis,
which I think owes a lot to Keynesian ideas – it is absolutely not an attempt
to guess what Keynes would have said if he could speak from the grave.
While regular readers of my blog will not find anything very
new here, I personally found it useful to put my various posts into a
brief but coherent whole. What struck me when I did so was the gulf between my
own perspective (which is not particularly original, and borrows a great deal
from the work of others like Paul De Grauwe),
and that of most Eurozone policymakers. It is a gulf that goes
right back to when the Euro was formed.
Much of the academic work before 2000 looking at the
prospects for the Euro focused on asymmetric or country specific shocks, or
asymmetric adjustment to common shocks due to structural differences between countries.
My own small contribution,
and those of many others, looked at the positive role that fiscal policy could play in
mitigating this problem. Yet most European policymakers did not want to hear
about this. Instead they were focused on the potential that a common currency
had for encouraging fiscal profligacy, because market discipline would be reduced.
Now this was a legitimate concern – as some Greek politicians
subsequently showed. However what I could not understand back then, and still cannot today, is how this concern can justify ignoring the problem of asymmetric shocks. I can still
remember my surprise and incomprehension when first reading the terms of the
Pact – what were Eurozone policymakers thinking? My incredulity has certainly
been validated by events, as the Eurozone was hit by a huge asymmetric shock as
capital flowed into periphery countries and excess demand there remained
unchecked. Now countercyclical fiscal policy in those countries would not have
eliminated the impact of that shock, at least not according to my own work, but it would have
significantly reduced its impact.
When I make this point, many respond that fiscal policy in
Ireland or Spain was probably contractionary during this time – am I really suggesting it
should have been tighter still? Absolutely I am, and the fact that this
question is so often asked partly reflects the complete absence of discussion
of countercyclical fiscal policy by Eurozone policymakers. Brussels was too
busy fretting about breaches of the SGP deficit limits, and largely ignoring
the growing competitiveness divide between Germany and most of the rest. (Maybe this is a little unfair on the Commission. I have been told that when the Commission did raise
concerns of this kind, they were dismissed by their political masters.)
If periphery countries had pursued aggressive
countercyclical fiscal policies before 2007, would the Eurozone crisis have started
and ended with Greece? Who knows, but it certainly would have been less of a
crisis than the one we have now.
This is just one aspect of the policy failure that is the Eurozone
crisis. Another is the fiction of expansionary austerity, and yet another is
the obsession by the ECB with moral hazard (or even worse
their balance sheet). As I say at the end of my EUROPP post, there is a pattern
to all these mistakes. It reflects a world view that governments are always the
problem, and private sector behaviour within competitive markets never requires
any intervention. Whether you attribute that view to Hayek, or Ordoliberalism, or
something else is an interesting academic question. But what the Eurozone
crisis shows all too clearly is the damage that this world view can do when it
becomes the cornerstone of macroeconomic policy.
